Britain's unemployment rate has fallen to its lowest level since late 2008, although pay growth was weaker than expected according to official data.

The Office for National Statistics said the UK jobless rate fell to 6.5 percent between March and May, in line with forecasts and down from 6.6 percent a month earlier. After yesterday’s shock jump in inflation, pay growth continued to founder - relieving worries about a pick-up in price pressures but squeezing household real income afresh.

The jobs news is another sign of the continuing UK
economic recovery, which has raised questions about how long the Bank can
keep interest rates at current record low levels - but the lack of pay pressure suggest there is some leeway.

Pay squeeze: Wage growth has failed to keep up with inflation since 2008 - apart from for a very brief period.

Unemployment rate (aged 16 and over), seasonally adjusted

']John Bulford at the EY ITEM Club said the decline in the unemployment rate will 'provide ammunition for interest rate hawks'.

'But the MPC has made it clear that it will be looking for signs of a pick-up in wage growth before it hikes interest rates and the latest data provides no evidence of this,' he added.

'The sharp contrast between the strength of the jobs market and the weakness of wage growth leaves the MPC in a difficult position. They will be keeping a close eye on various indicators of labour market slack as these are considered the precursors to a pick-up in wage growth. This is particularly true of this release as it will be the last published before the Bank compiles the August Inflation Report.

'On balance, we expect the MPC to begin raising rates from early 2015. The continued absence of any wage-led inflationary pressure, alongside recent signs in the output data that the economy's expansion may be cooling a touch, should stave off any desire among the MPC to hike interest rates this year.'

In the three months to May, total
annual average earnings including bonuses rose 0.3 per cent giving average weekly pay of £478, the weakest
growth since the depths of the financial crisis five years ago, the ONS
said.

That was below a consensus forecast of 0.5 per cent and down from 0.8 per cent in the three months to April.Excluding bonuses, the figure was 0.7 per cent, the lowest since records began in 2001.

An
ONS official said May's earnings growth was still affected by
comparisons with the same month last year when many companies made
delayed payments of bonuses to help their employees benefit from a cut
in income tax.

Howard Archer, chief UK and European economist at IHS Global said today’s labour market data has ‘mixed implications for both the Bank of England and households’.

He said: ‘The further marked fall in unemployment points to a still rapidly tightening labour market and also maintains concerns over UK productivity, thereby seemingly boosting the case for an early raising of interest rates by the Bank of England; but ongoing very low earnings growth suggests that there is still an appreciable amount of labour market slack with little pressure on inflation coming from pay.’

‘Meanwhile, the further marked rise in employment is good news for households but very low earnings growth is squeezing their purchasing power,’ Archer added.

The ONS data also sowed that more than 30 million people are in work, an increase of almost one million over the past year, the best figures since records began in 1971.

Unemployment fell by 121,000 in the quarter to May, to 2.12 million, the lowest since the end of 2009.

The number of people claiming jobseeker's allowance fell by 36,300 in June to 1.04 million, the 20th consecutive monthly fall and the lowest total since 2008.

Economic inactivity, covering those looking after a relative, on long-term sick leave, or no longer looking for work, was 67,000 lower at just under 8.8 million, the lowest figure for more than a decade.

Just over 78 per cent of men and 68 per cent of women are in work, giving an employment rate of 73.1 per cent.

Other figures from the ONS showed that
more than 4.5 million people were self-employed, the highest since
records began in 1992, after an increase of 404,000 over the past year.

Long-term
and youth unemployment have both continued to fall. The number of
jobless 16-to-24-year-olds fell by 64,000 over the latest quarter to
817,000, including 283,000 full-time students looking for part-time
work.

There was also a drop in the number of people in a part-time job wanting full-time work - down by 61,000 to 1.3 million.

Job
vacancies were up by 30,000 to 648,000, an increase of more than
100,000 on a year ago, but 48,000 fewer than the pre-recession peak at
the start of 2008.

Changes in people in employment between March to May 2013 and March to May 2014, seasonally adjusted.

Philip Shaw, chief economist at Investec Securities said: ‘Overall today’s report shows a continued marked squeeze in labour market conditions, albeit modestly offset by trends in long-term unemployment and that pay growth for the time being remains restrained.’

Even with unemployment staying subdued and Britain’s economy growing strongly helped by a booming housing market, the Bank of England is still widely expected to hold fire for as long as it can on a hike in UK interest rates despite a spike in inflation yesterday.

Consumer price inflation rose by more than expected in June driven by a surprise increase in food and clothing prices although Britain's longest stretch of low inflation for nine years was still confirmed by Tuesday's figures.

The ONS said CPI rose to 1.9 per cent in June to its highest level since the start of the year, above forecasts for an increase to 1.6 per cent, after falling to a four-and-a-half year low of 1.5 per cent in May.

That still meant CPI inflation has been at or below the Bank of England's 2 per cent target for seven months in a row, the first time this has happened since June 2005 - which was the last month of a low-inflation stretch that had lasted several years from 1997.

The consensus is for an early to mid-2015 first interest rate move, although some economists suggest a run of strong economic data could pull a rise forward to the end of this year.

Bank of England governor Mark Carney and other officials have said in recent months that the benchmark UK interest rate would rise only gradually from its current level of 0.5 percent and would probably settle at lower levels than before the financial crisis.

'We don't know exactly when the rate cycle is going to start. It will be driven by the data. We do expect markets to react to that data,' Mr Carney told MPs on the Treasury Select Committee yesterday.

However, a former Bank of England policymaker thinks the surprise jump in inflation has added to signs there is enough strength in the economy to withstand a rate rise.

Andrew Sentance, who sat on the Bank’s Monetary Policy Committee between 2006 and 2011, said June’s inflation figure formed ‘part of a picture suggesting there’s not a great need to wait in making the first move in interest rates’, according to the Daily Telegraph.

Mr Sentance, now senior economic adviser at PwC, said the Bank should start raising rates in the

second half of this year, rather than wait until 2015 when the MPC could be ‘tempted to postpone a rise beyond the general election, which would be too late’, the newspaper added.

Changes in people in employment between March to May 2013 and March to May 2014, seasonally adjusted.

'A delay in raising rates could leave the Bank ‘behind the curve’, he warned.

He said he continued to expect a rate rise in the fourth quarter of 2014.

And David Kern, chief economist at the British Chambers of Commerce said: ‘The case for not raising interest rates prematurely is strengthened further by weakening wage growth – and despite the increase in inflation recorded yesterday, it still remains below the Bank of England’s two percent target.

‘The MPC must boost business confidence by explaining that higher rates will only be considered when economic circumstances justify such a move,’ he added.

Rate caution: A spike up in inflation last month had put pressure on the Bank of England to raise interest rates sooner rather than later